Philippines: Industry-driven tobacco tax bill being rushed through

19 December 2016:

Manila: Come January 2017, a unitary tax rate on tobacco was scheduled to come into effect. It is an integral part of Philippines Sin Tax Reform Act of 2012 that saw taxes go up and smoking prevalence decline especially among the poor and young and earmarked funds for universal health coverage for poor families. However a new tax bill, HB 4144, supported by the tobacco industry was rushed through the Lower House in the Philippines this month, which will derail the public health and revenue gains made thus far.

Supported by local tobacco company, Mighty Corp, tobacco farmers and Congressmen from the tobacco growing region (referred to as the Northern Block), the Lower House approved Bill 4144 on its third and final reading on 13 December. While this Bill will see a slight increase in tobacco tax, however it will derail the unitary tax system scheduled to go into force in January 2017.

This Bill will retain the two-tier tax system on cigarettes: $0.64 (P32) per pack for cheaper brands and $0.72 (P36) per pack for high-end brands, with an annual five percent increase on these rates. However, the increase is so small that cigarettes will remain affordable. The Department of Health has objected to the proposed Bill, while the Department of Finance has warned that this Bill may see smokers switching to cheaper cigarettes and it will not fully discourage tobacco consumption.

A rather influential voice has come out to support this new Bill – the Catholic Church. No less than Archbishops have made statements in the media last week. However, this is no surprise since the Catholic Church is a recipient of Mighty Corp’s CSR grants for church renovations for several years. Although the Church has previously been unengaged in addressing the tobacco epidemic, it has now on cue come out batting for Bill 4144 commending it for its “good intentions” and how “many farmers depend on the crop to improve the lives of their families.”

In many countries, including the Philippines, the tobacco industry uses farmers to champion their cause. In reality, tobacco leaf prices are determined by leaf traders and the National Tobacco Administration which sets a floor price across all tobacco variants. However the farmers get good political mileage to argue against substantial tax increase. The Filipino farmers are complaining that their low grade leaves will not be purchased by the tobacco companies if the unitary tax system goes into force – an industry problem indeed.

While the transnational tobacco companies Philip Morris (PMFTC) and British American Tobacco (BAT) have not supported the new Bill, they however stand to gain from it since they sell cheap cigarette brands such as Boss, Jackpot, Champion and Pall Mall. Tobacco advertising and promotions such as discounts are still allowed at retailers in the Philippines.

BAT is playing it both ways by claiming it agreed with the Department of Finance’s position that a two-tier tax system will make tax administration tedious, and will not maximize revenues. However BAT knows how to benefit from a two-tiered tax system and increase its profits. In 2013, BAT had downgraded its Lucky Strike classification from ‘premium’ to ‘high’ enabling it to pay lower taxes. In February 2013, BAT launched cheap Lucky Strike costing P29 (USD0.71) – tax stamps paid P28.30.

Data on stick sales in the Philippines show the biggest decline was in 2013 immediately following the tax reform which saw substantial tax increase and price increase in cigarettes. It is clear from sales data that the tobacco companies were able to adjust their prices, and combined with aggressively advertising and marketing (such as the Be Marlboro promotions), sales increased again. BAT confirmed that despite the sin tax increase, consumption for cigarettes remained steady.

Euromonitor’s projection for cigarette stick sales for the Philippines shows increasing sales in the years to come.

Cigarette Stick Sales in the Philippines

2012

2013

2014

2015

2016

2017

2018

2019

2020

Sticks (billions)

102.5

86.7

94.9

90.3

83.5

84.6

86.1

87.7

97.8

The obligation under the WHO FCTC is clear – “price and tax measures are an effective and important means of reducing tobacco consumption”. Proponents of HB4144 have not shown by how much tobacco use will decrease. Since cigarettes remain affordable, it is clear that a substantial tax increase and subsequent price increase is needed to meet the goal of reducing smoking prevalence. Equally important, policy makers must be reminded that a tobacco industry supported HB4144 will ultimately protects the industry and this goes against the Philippines’ obligations under the global treaty.